Escalation Clauses in Rental Contracts

As a business owner, rent may be one of your highest costs. When you find the ideal premises, it can be tempting to snap them up before someone else does. However, doing so before thoroughly reading the contract could leave you paying far more than you hoped in the future.

Landlords commonly include escalation clauses in rental contracts. When you sign this, you agree that they can raise the rent. Prices of almost everything go up over time. So an escalation clause is not unreasonable in itself. However, the terms in it may make it so. Ensure you check the fine print before signing.

There Are Several Ways to Write Escalation Clauses

Before signing a lease, make sure you understand when your landlord can increase the rent and by how much.

Typically a landlord will want the right to raise the rent yearly. You may be able to negotiate a longer period. Be sure to determine limits as to how much they can increase it. There are three main ways they can use to calculate the future price increase:

• A fixed amount: It will rise by a set amount of dollars per square foot.

• A percentage: Remember it will be a percentage of the previous year’s rent. If you pay $1,000, a 5% increase means $1,050 next year, $1102.50 the year after, and so on.

• A linked amount: If inflation rises 2%, so will your rent. The Consumer Price Index (CPI) is another factor landlords may link their escalation clauses to.

It is best to ensure there is a reasonable escalation clause in any rental contract you sign. It allows you to predict your future costs. It avoids the landlord surprising you. As with any agreement, be sure to read it in detail or seek help from someone who will.